Must Read

[murphy_p_t]

i think this chart is a useful contribution to this discussion to illustrate the odds of beating the market.

http://www.zerohedge.com/news/2012-09-2 ... ing-market.

I was looking for another article which listed many funds & their relative performance to the S&P, but couldn't find it.

[MachineGhost]

i think this chart is a useful contribution to this discussion to illustrate the odds of beating the market.

http://www.zerohedge.com/news/2012-09-2 ... ing-market.

I was looking for another article which listed many funds & their relative performance to the S&P, but couldn't find it.

Not really surprising, but all it proves is that greed is not enough to be competent at anything.  Hedge funds don't have the same restrictive institutional hindrances as Wall Street, so its to be expected that a minority will outperform as opposed to virtually none for mutual funds.

[craigr]

Not really surprising, but all it proves is that greed is not enough to be competent at anything.  Hedge funds don't have the same restrictive institutional hindrances as Wall Street, so its to be expected that a minority will outperform as opposed to virtually none for mutual funds.

If anything, hedge funds are going to be much worse than an average fund for two reasons:

1) They charge much higher than average fees (2% a year is common)

2) They can also take a percentage of profits (20% is common)

The second part is unique to hedge funds and allows managers to win no matter what. Losing year? You get 2%. Winning year? You get 2% plus 20% of profits. Not bad work if you can get it.

Of course net of fees, the average hedge fund is likely to do much worse than even the average mutual fund mere mortals can buy. Most people should be thankful they don't qualify to buy hedge funds!

[hrux]

And why not take diversification to a new level by diversifying your strategies. That way you get additional non-correlation and are protected in the event one of them fails to work as anticipated.

Can you give me an example of a strategy that is uncorrelated with the PP? I'm assuming it would have to be a strategy that holds no stocks, no LTTs, no gold, and no cash?

"Strategy diversification" is a bit of a tricky concept. If you "diversify" equally among three stock-heavy portfolios and the PP, for example, what you effectively end up with is... one big stock-heavy portfolio. That's just one example.

Yes I can provide an example.  This is why I think something like managed futures (or other trend following) can add diversification. If everything is down on a sustained basis, then managed futures are likely to be up substantially. So the statement that nobody is safe no matter how they invest is not necessarily true. And if MF doesn’t work for some reason, you are no worse off because nothing else worked anyway. Also, if all PP asset classes are overvalued relative to other opportunities then everything might be down, but the PP could be down much more. For example, if international stocks were undervalued relative to domestics they could hold up much better in a decline.

[MachineGhost]

Yes I can provide an example.  This is why I think something like managed futures (or other trend following) can add diversification. If everything is down on a sustained basis, then managed futures are likely to be up substantially. So the statement that nobody is safe no matter how they invest is not necessarily true. And if MF doesn’t work for some reason, you are no worse off because nothing else worked anyway. Also, if all PP asset classes are overvalued relative to other opportunities then everything might be down, but the PP could be down much more. For example, if international stocks were undervalued relative to domestics they could hold up much better in a decline.

MF is a pretty poor way to get the benefits of the PP, because the PP components are largely what makes MF work along on top of trend following.  So just trend follow the PP components directly, unless you're a lazy bum!

[MediumTex]

And why not take diversification to a new level by diversifying your strategies. That way you get additional non-correlation and are protected in the event one of them fails to work as anticipated.

Can you give me an example of a strategy that is uncorrelated with the PP? I'm assuming it would have to be a strategy that holds no stocks, no LTTs, no gold, and no cash?

"Strategy diversification" is a bit of a tricky concept. If you "diversify" equally among three stock-heavy portfolios and the PP, for example, what you effectively end up with is... one big stock-heavy portfolio. That's just one example.

Yes I can provide an example.  This is why I think something like managed futures (or other trend following) can add diversification. If everything is down on a sustained basis, then managed futures are likely to be up substantially. So the statement that nobody is safe no matter how they invest is not necessarily true. And if MF doesn’t work for some reason, you are no worse off because nothing else worked anyway. Also, if all PP asset classes are overvalued relative to other opportunities then everything might be down, but the PP could be down much more. For example, if international stocks were undervalued relative to domestics they could hold up much better in a decline.

You're suggesting that a managed futures approach could potentially provide more safety and stability than the Permanent Portfolio?

Is this something you can do yourself, or do you need to find the right manager to manage the futures?

If such an approach can provide over 9.5% a year with less volatility than the PP, why do you think everyone isn't doing it (including institutional investors)?  Do you think that there might be some risk hiding in there somewhere that people aren't appreciating?

I would hate to see a person leave the PP so that they can buy into a managed futures strategy believing that they are taking on less risk than they have with the PP.

For you, hrux, what would it take for you to just throw in the towel with all the multiple strategies, trend following, active management and "managed futures" and just buy into the PP and focus your energy elsewhere?  Is there any data, theory or comparative performance that could persuade you? 

It seems like you have put a lot of energy into an approach that by your own admission had badly lagged the PP.  What does your manager say about this?  Has he offered to return his fees?  Do you feel that you are getting a good value for what you are paying him, considering that you would have been able to do a lot better on your own without his help?

[Storm]

One thing I've noticed, personally, is that every bit of money I've taken out of the PP, be it 5% or 10% of my total portfolio, for the purpose of trying to beat PP performance, has miserably underperformed the PP, or just plain taken a loss, while the PP has given steady gains.

That being said, my wife's PP, which was started in 2/2012, with just a small amount of IAU, TLT, and FUSEX, is only up 2.32% in 9 months... recent performance has suffered.  Then again, if I was 100% in equities, I would have only had a 5.24% gain, so really, is having a 2.9% higher gain in 9 months worth all the volatility and risk of having a 100% stock portfolio?

Seriouly, perhaps the PP will perform poorly the next few years, but then we must ask, what will perform better?  Stocks, bonds, cash, REITs?  Who can tell?  If you can tell you will be able to make a lot of money...

[Pointedstick]

Seriouly, perhaps the PP will perform poorly the next few years, but then we must ask, what will perform better?  Stocks, bonds, cash, REITs?  Who can tell?  If you can tell you will be able to make a lot of money...

This is such a great point to keep in mind! You're exactly right: if you think the PP will underperform, than what's your alternative? Whatever it is, it's bound to be riskier since you'll be concentrating your money into fewer asset classes or less safe assets.

[AdamA]

One thing I've noticed, personally, is that every bit of money I've taken out of the PP, be it 5% or 10% of my total portfolio, for the purpose of trying to beat PP performance, has miserably underperformed the PP, or just plain taken a loss, while the PP has given steady gains.

That being said, my wife's PP, which was started in 2/2012, with just a small amount of IAU, TLT, and FUSEX, is only up 2.32% in 9 months... recent performance has suffered.  Then again, if I was 100% in equities, I would have only had a 5.24% gain, so really, is having a 2.9% higher gain in 9 months worth all the volatility and risk of having a 100% stock portfolio?

Seriouly, perhaps the PP will perform poorly the next few years, but then we must ask, what will perform better?  Stocks, bonds, cash, REITs?  Who can tell?  If you can tell you will be able to make a lot of money...

I think the even larger issue is that even when you "pick a winner" it's hard to know when to exit the position. 

Stocks have done pretty well this year, but if I had a VP that was invested in stocks, I'm not sure i would know what to do right now...hold or sell (?).

[MachineGhost]

If such an approach can provide over 9.5% a year with less volatility than the PP, why do you think everyone isn't doing it (including institutional investors)?  Do you think that there might be some risk hiding in there somewhere that people aren't appreciating?

Leaving aside access issues which typically requires $100K bare minimum to participate (and probably meeting the SEC's minimum net worth requirements),  MF don't provide less volatility.  In fact, they're widely renowned for humongous drawdowns on order of 50%-75%.

Again, if you want the benefits of MF which is all in the trend following component, then do it within the PP framework.  There's no question the PP components are all hedged against each other.  It would be hard to screw up.

[MachineGhost]

I have to ask, are we looking at the same managed futures?

Yep.  Look at the top MF trend followers and you will find historical drawdowns that severe.  But, there is also a winner bias effect in that MF typically close or merge when hitting a 50% drawdown, so they won't appear in rankings chart.

Again, there is nothing special about managed futures.  They invest in the same broad asset classes as the PP does.  And benefit from the same protection from T-Bonds in crises if theres any exposure.  MF have huge drawdowns because the bet too big in one asset class or another.

[MediumTex]

As for the construction itself, trend-following MFs are probably the least-hedged of the bunch.  Considering they're long or short in any of 30-40 futures, how their exposure to T-bonds factors into things is beyond me.  The trend-followers as a class benefit during crisis not by any specific asset allocation, but by the fact that they stop out any exposed positions.  An extended crisis also tends to generate strong momentum signals which they can either jump in either on the long or short side.  This makes up the bulk of their returns.  The rest of the time, they're barely treading water with a boatload of volatility.

That last tidbit is the important one, because no one - and I mean absolutely no one - should dedicate their entire portfolio to a MF.  The horizon is too long and the returns are too lumpy.  We're talking about at most 10-20% of your overall portfolio dedicated to a diversified mix of MF strategies.  These things don't hedge like the PP, and that in itself is the primary motivation for their inclusion.

What value does something like that have to an average investor?

It seems like what often happens is the average investor stumbles into something like that without fully understanding it and rarely has the experience he was hoping for.

That criticism is not of the strategy itself, but rather of the amount of knowledge, skill, experience and sophistication it requires in the user of the strategy. 

[MachineGhost]

My research-fu isn't as good as yours apparently.  I'm getting them clustered around 10%-20%.  Which database are you using?

You need to go back a lot further than just 10-years in the industry CTA databases.  And you need to look at the survivor-free databases.

I did forget to consider the ability to short, but that typically goes along with being long T-Bonds during a crisis anyway.

Here are the 5-year results for two publically-available managed futures funds:

http://finance.yahoo.com/q/bc?s=LSC&t=5 ... z=l&q=c&c=

http://finance.yahoo.com/q/bc?t=5y&l=on ... rymfx&ql=1

All of the hedge fund replication indexes have a high correlation to trend following managed futures.  They are essentially one and the same.

Again, there's nothing special about trend following.  Do it yourself on the four core PP assets instead of paying someone 2/20.  All broad asset classes that managed futures trade in are covered.

[hpowders]

The long term performance is dismal and the second one has an expense ratio of close to 2%.

[MachineGhost]

Here's some more managed futures funds:

http://finance.yahoo.com/q/bc?s=RYMFX&t ... ax%2Cmhfcx

[Kel]

Here is Gesalt's firm's actual performance for the last 2 plus years net of their 2% management fee. In summary 6.84% annualized return and 4.95% drawdown in Canadian dollars which appears to have out performed the PRPFX fund during that time frame with much lower drawdown on a monthly basis.
(I took PRPFX performance from Morningstar)

http://bpgassociates.com/docs/2014-07-3 ... tility.pdf

https://flic.kr/ps/q5Tcz or

                JAN  FEB    MAR  APR    MAY  JUN  JUL  AUG  SEP  OCT  NOV  DEC    YTD
2014
PRPFX    -0.23 3.93 -1.34  0.64  -0.41  2.86  -1.01                                                4.44
DARWIN  2.89 0.5  -1.19 -0.12  0.86  -0.18  1.0                                                  3.76
2013
PRPFX      1.95 2.22 0.87 -1.78  -2.04 -4.53  3.52  1.48  0.53  1.56 -1.49  0.4     -1.75
DARWIN 0.89 2.42 0.32   0.6   -0.47 -0.93  0.4    0.33-1.94 3.05 0.71 -0.25    5.13
2012
PRPFX                                          -5.04  2.01  0.28  2.35  2.48 -0.97 0.27  0.19    1.57
DARWIN                                        3.97 -0.59  1.21 -1.88 1.37 0.96 -0.25   -0.8      3.99


p.s. I think SMF is about as un user friendly as you can get...I tried to post this as an image but that didn't work and tried HTML code which likely is not enabled and below is my flickr link embedded between the image symbols etc....should be easier than it is imho... whatever happened to drag and drop  . Also I apologize for poor quality of table because the table syntax is complicated to learn so I just tried to format myself